Tax rebate crackdown likely to spark deal activity

Beckett: riskier than new builds. Picture: Peter Devlin

DOMINIC JEFF

A CRACKDOWN on tax rebates for landlords renovating commercial property is likely to lead to a rush of deal activity before changes are enforced in April, according to a Scottish industry expert.

Virginia Beckett, director of capital markets at property specialist CBRE, says a review by the taxman of the Business Premises Renovation Allowance (BPRA) will mean many of the larger projects which took advantage the tax break since its introduction in 2007 would no longer be viable.

“There are numerous examples of such buildings which have been funded and renovated through the use of 100 per cent capital allowances generated through BPRA, many of which would never have been renovated without public sector support in some form,” she said.

The UK government is extending the scheme until 2017 but HM Revenue & Customs (HMRC) recently carried out a review of BPRA and has published new guidelines aimed at closing a number of perceived loopholes. Developers will no longer be able to claim tax relief on items such as legal fees and financing arrangement charges relating to a project.

Beckett said smaller landlords who were intending to renovate properties anyway will continue to benefit from the scheme by claiming back money directly spent on the project through their tax returns, but specialist developers will be put off taking on more risky redevelopment projects.

For example, the £27.5 million deal that turned Glasgow’s St Andrew House into a hotel would not have happened had the developer not been confident of claiming back some administrative costs, she said.

“There will undoubtedly be a rush by BPRA promoters to complete tax-led investment schemes within the current tax year, before the 2014 legislation comes into force, as many of the projects on the stocks will not be viable under the new regime. Renovations are often more risky than new build and the returns required by developers and promoters reflects this.”

Beckett said that there are considerable costs around structuring such investments and under the new rules the majority of those costs will not be allowable. Developers will be able to claim tax relief under the old rules if they complete contracts before the end of the current tax year, as that will mean the costs have been incurred under HMRC rules.

Beckett added: “Although the number and scale of BPRA projects will undoubtedly reduce, and some promoters may exit the BPRA-led market, the availability of 100 per cent capital allowances could still have considerable value for tax-paying landlords and tenants who undertake renovations and conversions of existing vacant buildings, particularly when viability is otherwise marginal.”

The public sector may also be in a position to benefit from BPRA through the introduction of private equity into regeneration projects located in assisted areas, potentially reducing levels of taxpayer support required for strategic projects.

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